The slight acceleration in the US month-on-month CPI reading for August was a little surprising after the softer PPI but just goes to highlight the complexity which faces the Federal Reserve and those of us trying to plot a future path for markets. Much can be made of, and indeed there is logic in, how analysts attribute the slight blip higher to the passing of tariff costs to customers, but given other drivers, the monthly data is largely ignored. The reasoning is the unmoved Core CPI both monthly and yearly came in bang on expectation but those that view the state of US employment more important than tolerable price rises were given a shot in the arm by yet another rise in weekly Jobless Claims. Given the consistency of metrics that show a troubled jobs market, the reaction by the FED is predicted to match falling employment with falling interest rates. Pricing of 71-basis points cut by the end of the year is up from last week’s 67-basis points on the CME FedWatch tool and there is now keener interest in predicting quarter point cuts for the first five meetings in 2026. Given such speculation on a looser monetary environment in the US, the raging bulls of the stock markets needed little encouragement with the bourse indices of the world taking yet another hike.

If intrigue and confusion tickle your fancy than one need not look further than the ever-diverging paths of oil balance predictions between the International Energy Agency and OPEC. The IEA increased its supply surplus forecast growth from 2.5mbpd to 2.7mbpd for this year with an even more bearish take in 2026. Next year, the European based agency raised its oversupply number from 3mbpd to 3.3mbpd. Apart from wheeling out its usual favourite blame in the influence of oil production from the Americas, the IEA’s main concern comes from the increased return of barrels from OPEC. Ironic, but predictably, then that the cartel’s monthly report takes a much more friendly swipe at proceedings. The IEA sees world oil demand to increase by 740kbpd in 2025, whereas OPEC’s forecast is nigh double at 1.29mbpd and sees less of a threat from producers outside of the group’s influence in 2026. Given a consistent OPEC supply of 42mbpd and its perceived production growth of only 630kbpd from competitors, analysis suggests instead of the meaty surplus as seen in the IEA’s offering, there will be by OPEC’s standard a deficit of 700kbpd. Of course, both reports ask for tolerance due to the fluid state of tariffs and increased future sanctions, but the differences are stark in comparison and are likely to be so in the future. As it stands, the market reaction suggests our populace gives more credence to the IEA, and its gloomy writings continue to worry prices lower this morning.

The complications of a stronger Euro

It takes no massive economic leap in realisation that any weakness in the US Dollar will benefit all commodities that find themselves priced in the globe’s marker. The commodity suite aside, a wilting US Dollar is about to see interesting developments and possible central bank influences in foreign exchange particularly with the great currency pairings, topped by the most important, that of the Euro. There has been a divergent path struck by the Federal Reserve and the European Central Bank in recent times. Up and until June of this year, the ECB made eight quarter-point cuts in a year in order to instil some sort of life into the flagging economic fortunes of Germany, France and Italy, the largest economies of the European bloc. The decisions to go early and risk being exposed to stubborn inflation was also to get ahead of tariff policies of the new Trump Administration. The added benefit would be a favourable exchange rate for Europeans who conducted business with the US. However, it has not panned out as first thought. The erratic rollout of President Trump’s tariffs has prompted investors to question the safe haven and stable tags that have always adorned the greenback. The Euro has gained 10 percent against the dollar since the start of the year because if there is one thing that long-term investors, including governments, insist on in a modal currency is predictability. Yesterday’s decision by the ECB to hold pat on rates and because of the recent metrics around US employment prompting many to rationalise a new bout of decreased rates from the FED, bullish positions are once again flowing into the Euro. As seen on Bloomberg, data from the Depository Trust and Clearing Corporation indicates that one in three bullish wagers since Friday target a break above $1.20, with the current €/$ pair printing $1.17. 

It is also interesting to note how the Euro has almost ignored the political upheaval in one of its biggest economies, namely France. In oil circles we often lay blame for the recent ineptitude in OPEC being able to control supply due to the serial cheaters that time and again break quota. If Iraq is the villain of the piece in the drama to control price by supply, then France is the villain in the European Central Bank’s battle to keep any sort of handle on fiscal debt. The land of Galle has always been an over spender, its attitude to capitalism and materialistic ways imbues a sense of quiet envy from many of us on how it much prefers to look after pensions than the fortunes of stock market investors. For all the hippy in us, even the most ardent capitalist haters realise that some sort of book squaring is needed. But the current plight of Emmanuelle Macron in having to name four Prime Ministers in a twelve-month period belies any attempt at managing cascading debt. The days of France being able to service high debt from GDP growth, low interest rates and high credit rating are gone. It has a debt to GDP ratio of 114% and a European Union rule busting 5.3% against a 3% deficit limit. We collectively throw zeroes around like confetti in modern times, but the GDP ratio is equal to a mind boggling €3.3 trillion, and as reported by Reuters, French debt payments are possibly set to reach more than €100 billion by 2029 the Cour des Comptes audit office warned earlier this year. This might just become a whole lot worse tomorrow when the rating agency Fitch reassesses France’s credit rating and a downgrade would drop France's to A+, seven notches above junk territory and the lowest among peers.

France is picked here because it is á la mode in terms of it being the most problematic of all European economies. Indeed, the debt to GDP ratio in Italy is 138% and in Greece a whopping 152%, but they do not have the anti-austerity political will of France nor the flagrant abuse of deficit limits. Another developing problem for the ECB is that the third largest economy in the world and the pinnacle of the Union, Germany, is about to embark on a huge spending plan. A landmark stimulus package of €500 billion, with that likely doubling if the promised spend on its military finds fruition gives, along with the debt portrayed above, a collective migraine for Christine Lagarde and her men of grey cohort. Cutting interest rates into stubborn spending, debt and an inflow of safety seeking investors would not just light the blue touch paper of inflation, it would torch it. A sinking US Dollar and a rising Euro would at first glance be oil-bullish, but nothing in modern times is so simple. The Euro’s influence is indirect, and mainly as suggested due to the exchange rate, but other factors stop it being clear cut. There is future where any stimulus and debt in the Old Continent is not guaranteed to see a more confident and free-spending populace and the bite of tariffs have not yet revealed their teeth marks. If a lower US Dollar encourages oil prices higher, Europe will not only be faced with stubborn interest rates, and inflation, but also higher energy costs that will cripple it once again.

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